RCL 2Q 2013 REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

OVERALL:

IN-LINE: As seen by our recent pricing surveys, weaker Caribbean market and aggressive pricing is being offset by a steadily improving Europe market for Royal Caribbean. FY 2013 guidance remains relatively unchanged. Caribbean pressures should not be any comfort, particularly to Carnival.

PREVIOUSLY: "We saw improvement in all categories for onboard revenue. Ships that have been recently revitalized and vessels sailing on new itineraries did particularly well."

CARIBBEAN

WORSE: Mgmt reduced Caribbean expectations for the rest of FY 2013 as pricing competition has picked up recently

PREVIOUSLY: "Over the last few weeks though, we have seen an improvement in booking activity and we are still forecasting record yields for the Caribbean."

BOOKINGS CURVE

SAME: Booking window has been expanding

PREVIOUSLY: "On average, our guests are booking their cruise about two weeks earlier this year than they were in 2011 and 2012. In fact, the booking curve has looked strikingly similar to 2008 for the last several months."

EUROPE

BETTER: Mid single-digits ticket yield growth is above expectations. Mgmt is more comfortable with the outlook on Europe and is optimistic on this market in 2014.

PREVIOUSLY: "We considered our European summer revenue projections to have more risks attached to them in comparison to other spheres of deployment. Although there is still somewhat limited visibility for all of our summer deployment, at this juncture, in Europe, we are sufficiently ahead of 2012 on both rate and occupancy, to be comfortable that our European deployment is of comparable risk to our other programs."

CHINA/JAPAN

SAME: one of the drivers which lowered yield expectations for the year. The terriotory disputes have resulted in 30 modified sailings and increased bookings volatility. China is 3% deployment for 2013.

PREVIOUSLY: "Turning to China, the region that represents 5% of our capacity in 2013. The hostility between Japan and China surrounding the disputed islands in the East China Sea continues to affect our itineraries and our demand generation. We have now removed the Japanese ports of call from nearly all of 2013's North Asia program. As a result, most itineraries from our China homeport of Shanghai and Tianjin are calling only on ports of call on South Korea."

AUSTRALIA

SAME: Increased capacity continues to pressure yields in this market

PREVIOUSLY: "In the near-term is flat to slightly lower yield outlook for us for this year. we would expect that Australia, as a southern summer market, would continue to grow and be a mainstay of the cruise industry going forward."

PULLMANTUR

SAME: Has been lagging its competitiors. RCL recently opened a new head office in Latin America.

PREVIOUSLY: "Pullmantur's performance is inevitably affected by that [Spain] very strongly and that's been a big disappointment and I don't see any quick turn away from massive improvement given the economic situation."

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07/25/13 11:33 AM EDT

Initial Claims: Good, But Less Good

Takeaway:The rate of improvement in the labor market slowed notably this past week, but we're not going to get excited by one week of data.

A possible explanation is that we're eclipsing the auto plant closings, which create significant NSA volatility. Recall that this year, due to heavy demand, there were far fewer auto plant shutdowns than in the corresponding periods last year. That said, the auto dynamic is a two-week phenomenon, so it wouldn't explain the deviation from the trend we've been seeing the last nine weeks.

Bear in mind that in less than six weeks, we'll shift out of the seasonally-adjusted data headwind period into the data tailwind period, which will last six months from September through February, 2014.

The Data

Prior to revision, initial jobless claims rose 9,000 to 343,000 from 334,000 week-over-week, as the prior week's number was revised up by 2,000 to 336,000.

The headline (unrevised) number shows claims were higher by 7,000 week-over-week. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25K week-over-week to 345.25K.

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.8% lower year-over-year, which is a sequential deterioration versus the previous week's year-over-year change of -10.6%

"While the operating environment has been frustrating, our bookings trajectory is looking good and I'm thrilled to see our cost initiatives beginning to pay off. Exploiting this positive momentum will help us take our returns and our profitability to the next level."

- Richard D. Fain, chairman and chief executive officer

CONF CALL

2Q exceeded expectations; full-year 2013 guidance looking better

In recent weeks, competitive pricing has gotten more intense

Further cost controls initiative in 2014

'Feels good to come to a inflection point both on revenues and expenses'

2014 load factor and pricing higher YoY

Pullmantur new head office in Latin America

Cost initiatives will be on the overhead component

Want to achieve flat NCC ex fuel in 2014

2012-2016 capacity growth will be 4% assuming no dispositions

Oasis and Allure of the Seas - most energy efficient ships in the world; their energy consumption is 25% better than rest of fleet; Quantum will be even more energy efficient

Early Look

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INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD

Takeaway:The rate of improvement in the labor market slowed notably this past week, but we're not going to get excited by one week of data.

Slack Sails

This past week, rolling NSA initial claims were 8.8% lower than the prior year. This marks a decelerating rate of improvement vs the prior week, when rolling NSA claims were better by 10.6%. On a single week basis, NSA claims were 0.8% lower than the previous year, a sharp deceleration vs the prior 9 prints of: -9.9%, -13.3%, -9.4%, -9.2%, -7.7%, -11.7%, -9.4%, -7.6% and -8.0%.

A possible explanation is that we're eclipsing the auto plant closings, which create significant NSA volatility. Recall that this year, due to heavy demand, there were far fewer auto plant shutdowns than in the corresponding periods last year. That said, the auto dynamic is a two-week phenonemon, so it wouldn't explain the deviation from the trend we've been seeing the last 9 weeks.

Bear in mind that in less than six weeks we'll shift out of the seasonally-adjusted data headwind period into the data tailwind period, which will last six months from September through February, 2014.

The Data

Prior to revision, initial jobless claims rose 9k to 343k from 334k WoW, as the prior week's number was revised up by 2k to 336k.

The headline (unrevised) number shows claims were higher by 7k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25k WoW to 345.25k.

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.6%

Management cited weather and slower industry trends as the two main drivers of weaker sales than expected in the quarter. We don’t like to see anyone pull the weather card, but CAKE’s reasoning holds more legitimacy than that of some of its peers as its restaurants struggled to utilize their patio space at levels seen in the past.

While industry trends are slowing, CAKE’s comparable sales have outpaced the industry for at least 18 months and we expect this trend to continue. Although 3Q13 should be challenging due to slowing industry trends and a tough comp, we don’t see any fundamental issues within the business. We expect sales to rebound in 4Q13 and carry on into 2014. Management acknowledged that they will not make any desperate or unadvised attempts to boost sales in 2H13.

Rather, they will continue to focus on the core of the business and building the brand for the long-term through new restaurants (at “A+” sites), menu innovation, quality food, and high service standards.

Below are some of our thoughts on 2Q13 results.

What We Liked

Increasing the quarterly dividend by 17%

Plan to repurchase up to $125 million worth of shares in 2H13

Full-year development plans remain on track to open 8-10 new restaurants

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